Research articles for the 2020-08-17

A Flexible Design for Funding Public Goods
Vitalik Buterin,Zoe Hitzig,E. Glen Weyl

We propose a design for philanthropic or publicly-funded seeding to allow (near) optimal provision of a decentralized, self-organizing ecosystem of public goods. The concept extends ideas from Quadratic Voting to a funding mechanism for endogenous community formation. Individuals make public goods contributions to projects of value to them. The amount received by the project is (proportional to) the square of the sum of the square roots of contributions received. Under the "standard model" this yields first best public goods provision. Variations can limit the cost, help protect against collusion and aid coordination. We discuss applications to campaign finance, open source software ecosystems, news media finance and urban public projects. More broadly, we offer a resolution to the classic liberal-communitarian debate in political philosophy by providing neutral and non-authoritarian rules that nonetheless support collective organization.

A Quantitative Theory of the Credit Score
Chatterjee, Satyajit,Corbae, Dean,Dempsey, Kyle,Rios-Rull, José-Victor
What is the role of credit scores in credit markets? We argue that it is a stand in for a market assessment of a person’s unobservable type (which here we take to be patience). We pose a model of persistent hidden types where observable actions shape the public assessment of a person’s type via Bayesian updating. We show how dynamic reputation can incentivize repayment without monetary costs of default beyond the administrative cost of filing for bankruptcy. Importantly we show how an economy with credit scores implements the same equilibrium allocation. We estimate the model using both credit market data and the evolution of individual’s credit scores. We find a 3% difference in patience in almost equally sized groups in the population with significant turnover and a shift towards becoming more patient with age. If tracking of individual credit actions is outlawed, the benefits of bankruptcy forgiveness are outweighed by the higher interest rates associated with lower incentives to repay.

A Spatial Stochastic SIR Model for Transmission Networks with Application to COVID-19 Epidemic in China
Tatsushi Oka,Wei Wei,Dan Zhu

Governments around the world have implemented preventive measures against the spread of the coronavirus disease (COVID-19). In this study, we consider a multivariate discrete-time Markov model to analyze the propagation of COVID-19 across 33 provincial regions in China. This approach enables us to evaluate the effect of mobility restriction policies on the spread of the disease. We use data on daily human mobility across regions and apply the Bayesian framework to estimate the proposed model. The results show that the spread of the disease in China was predominately driven by community transmission within regions and the lockdown policy introduced by local governments curbed the spread of the pandemic. Further, we document that Hubei was only the epicenter of the early epidemic stage. Secondary epicenters, such as Beijing and Guangdong, had already become established by late January 2020, and the disease spread out to connected regions. The transmission from these epicenters substantially declined following the introduction of human mobility restrictions across regions.

A Stochastic Control Approach to Defined Contribution Plan Decumulation: "The Nastiest, Hardest Problem in Finance"
Peter A. Forsyth

We pose the decumulation strategy for a Defined Contribution (DC) pension plan as a problem in optimal stochastic control. The controls are the withdrawal amounts and the asset allocation strategy. We impose maximum and minimum constraints on the withdrawal amounts, and impose no-shorting no-leverage constraints on the asset allocation strategy. Our objective function measures reward as the expected total withdrawals over the decumulation horizon, and risk is measured by Expected Shortfall (ES) at the end of the decumulation period. We solve the stochastic control problem numerically, based on a parametric model of market stochastic processes. We find that, compared to a fixed constant withdrawal strategy, with minimum withdrawal set to the constant withdrawal amount, the optimal strategy has a significantly higher expected average withdrawal, at the cost of a very small increase in ES risk. Tests on bootstrapped resampled historical market data indicate that this strategy is robust to parametric model misspecification.

A free boundary problem arising from a multi-state regime-switching stock trading model
Chonghu Guan,Jing Peng,Zuo Quan Xu

In this paper, we study a free boundary problem, which arises from an optimal trading problem of a stock that is driven by a uncertain market status process. The free boundary problem is a variational inequality system of three functions with a degenerate operator. The main contribution of this paper is that we not only prove all the four switching free boundaries are no-overlapping, monotonic and $C^{\infty}$-smooth, but also completely determine their relative localities and provide the optimal trading strategies for the stock trading problem.

Automatic Financial Feature Construction
Jie Fang,Shutao Xia,Jianwu Lin,Zhikang Xia,Xiang Liu,Yong Jiang

In automatic financial feature construction task, the state of the art technic leverages reverse polish expression to represent the features, then use genetic programming (GP) to conduct its evolution process. In this paper, we propose a new framework based on neural network, alpha discovery neural network (ADNN). In this work, we made several contributions. Firstly, in this task, we make full use of neural network's overwhelming advantage in feature extraction to construct highly informative features. Secondly, we use domain knowledge to design the object function, batch size, and sampling rules. Thirdly, we use pre-training to replace the GP's evolution process. According to neural network's universal approximation theorem, pre-training can conduct a more effective and explainable evolution process. Experiment shows that ADNN can remarkably produce more diversified and higher informative features than GP. Besides, ADNN can serve as a data augmentation algorithm. It further improves the the performance of financial features constructed by GP.

Backtesting Macroprudential Stress Tests
Ramadiah, Amanah,Fricke, Daniel,Caccioli, Fabio
In this paper, we consider models of price-mediated contagion in a banking networkof common asset holdings. For these models, the literature proposed two alternativeclasses of liquidation dynamics:threshold dynamics(banks liquidate their invest-ment portfolios only after they have defaulted), andleverage targeting dynamics(banks constantly rebalance their portfolios to maintain a target leverage ratio).We introduce a one-parameter family of non-linear liquidation functions that inter-polates between these two extremes. We then test the capability of these modelsto predict actual bank defaults (and survivals) in the United States for the years2008-10. We show that the model performance depends on the type of shock be-ing imposed (idiosyncratic versus systematic). We identify the two most relevantasset classes, for which the model has predictive power when these asset classes areexposed to an initial shock. In these cases, the model performs better than alter-native benchmarks that do not account for the network of common asset holdings,irrespective of the assumed liquidation dynamics. We also show how the best per-forming liquidation dynamics depend on the combination of the initial shock leveland the market impact parameter, on the cross-sectional variation in the marketimpact parameter, and on the number of asset liquidation rounds.

Behavioral Welfare Economics and Risk Preferences: A Bayesian Approach
Gao, Sherry,Harrison, Glenn W.,Tchernis, Rusty
We propose the use of Bayesian estimation of risk preferences of individuals for applications of behavioral welfare economics to evaluate observed choices that involve risk. Bayesian estimation provides more systematic control of the use of informative priors over inferences about risk preferences for each individual in a sample. We demonstrate that these methods make a difference to the rigorous normative evaluation of decisions in a case study of insurance purchases. We also show that hierarchical Bayesian methods can be used to infer welfare reliably and efficiently even with significantly reduced demands on the number of choices that each subject has to make. Finally, we illustrate the natural use of Bayesian methods in the adaptive evaluation of welfare.

Combining uncertainty with electricity and gas sector coupling -- is it worth the effort?
Iegor Riepin,Thomas Möbius,Felix Müsgens

The interdependence of electricity and natural gas markets is becoming a major topic in energy research. Integrated energy models are used to assist decision-making for businesses and policymakers addressing challenges of energy transition and climate change. The analysis of complex energy systems requires large-scale models, which are based on extensive databases, intertemporal dynamics and a multitude of decision variables. Integrating such energy system models results in increased system complexity. This complexity poses a challenge for energy modellers to address multiple uncertainties that affect both markets. Stochastic optimisation approaches enable an adequate consideration of uncertainties in investment and operation planning; however, stochastic modelling of integrated large-scale energy systems further scales the level of complexity. In this paper, we combine integrated and stochastic optimisation problems and parametrise our model for European electricity and gas markets. We analyse and compare the impact of uncertain input parameters, such as gas and electricity demand, renewable energy capacities and fuel and CO2 prices, on the quality of the solution obtained in the integrated optimisation problem. Our results quantify the value of encoding uncertainty as a part of a model. While the methodological contribution should be of interest for energy modellers, our findings are relevant for industry experts and stakeholders with an empirical interest in the European energy system.

Comment Letter In Opposition to the OCC's Proposed
Wilmarth, Arthur E.
This comment letter opposes the adoption of a proposed rule published by the Office ofthe Comptroller of the Currency (“OCC”) on July 22, 2020. 85 Fed. Reg. 44223 (2020). Theproposed rule would determine whether a national bank or federal savings association “makes aloan and is the ‘true lender’ in the context of a partnership between a bank and a third party, suchas a marketplace lender.” Id. The proposed rule â€" to be codified at 12 C.F.R. 7.1031 â€" wouldprovide that a national bank or federal savings association is deemed to “make” a loan if theinstitution, “as of the date of origination: (a) Is named as the lender in the loan agreement; or (b)Funds the loan.” Id. at 44228.The proposed rule is designed to operate in combination with the OCC’s recently-adopted“Madden-fix rule.” 85 Fed. Reg. 33530 (2020). Under the Madden-fix rule, a loan that is“made” by a national bank or federal savings association will retain its preemptive immunityfrom state usury laws under 12 U.S.C. 85 or 1463(g) if the loan is “subsequently sold, assigned,or otherwise transferred” to a nonbank.The proposed rule â€" in tandem with the Madden-fix rule â€" would allow a national bank orfederal savings association to form “partnerships” with nonbank lenders, including paydaylenders and auto title lenders. The two rules would allow a national bank or federal savingsassociation to be treated as the “lender” under 12 U.S.C. 85 or 1463(g) for loans that areoriginated in its name or that it funds, even if it sells those loans to a nonbank “partner” one dayafter the loans are originated. 85 Fed. Reg. at 44225. The proposed rule would preempt state“true lender” laws, under which courts apply a substance-over-form analysis and considerseveral fact-specific issues in determining whether a loan is “made” by a bank as opposed to itsnonbank “partner.”The two rules would permit a nonbank “partner” of a national bank or federal savingsassociation to claim preemptive immunity from state usury laws under 12 U.S.C. 85 or 1463(g).The national bank or federal thrift could act as a mere conduit by quickly transferring loans tothe nonbank “partner,” which could assume all of the economic risks and control the terms andenforcement of the loans. Such “partnerships” would amount to “rent-a-charter” schemes, whichthe OCC has barred national banks from entering since the early 2000s.In addition, the proposed rule evidently seeks to preempt a wide range of other state lawsâ€" including state licensing, examination, and consumer protection laws â€" that would otherwiseapply to nonbank lenders that establish “partnerships” with national banks or federal savingsassociations. Thus, the proposed rule’s scope of preemption is not limited to state usury lawsand potentially affects a far broader range of state laws.This comment letter argues that the OCC’s proposed rule is unlawful, invalid, andcontrary to the public interest for the following reasons:(1) The proposed rule does not comply with 12 U.S.C. 25b, which governs the OCC’sauthority to issue rules that seek to preempt state consumer financial laws.(2) The proposed rule unlawfully seeks to override state “true lender” laws withoutcongressional authorization and in contravention of applicable court decisions.(3) The proposed rule is contrary to the public interest because it would allow nationalbanks and federal savings associations to establish “rent-a-charter” schemes with nonbanklenders, thereby encouraging predatory lending and other abusive practices that would inflictvery serious injuries on consumers and small businesses.(4) The proposed rule violates the Administrative Procedure Act because the OCC hasnot provided the required public notice of its intention to reverse the agency’s existing policybanning “rent-a-charter” schemes, as well as the OCC’s factual, legal, and policy reasons forreversing that policy. Accordingly, the OCC may not adopt the proposed rule unless the agencyfirst provides to the public: (A) notice of the OCC’s intention to reverse its existing policybanning “rent-a-charter” schemes and an explanation of the agency’s reasons for doing so, and(B) a reasonable opportunity to submit comments on the OCC’s proposal to reverse that policyand its stated reasons for doing so.This comment letter contends that the OCC should withdraw the proposed rule andshould not issue any other rule or order that would (1) override state “true lender” laws, or (2)allow national banks to establish “rent-a-charter” schemes with nonbank lenders.

Contract Structure, Time Preference, and Technology Adoption
Chowdhury, Shyamal,Smits, Joeri,SUN, QIGANG
Do constraints to technology adoption vary by behavioral traits? We randomize 150 villages in Bangladesh into being offered standard microcredit, loans with a grace period, the choice between those two contracts, and control. No discernible average effects are detected on the adoption of mechanized irrigation, hybrid seeds, and chemical fertilizers. However, credit access enhances technology adoption among present-biased farmers, whose output and profits increase. These effects are driven by the standard contract and choice villages, as present-biased farmers select out of the grace period contract. This suggests offering commitment and screening applicants on present bias to enhance agricultural technology adoption.

Does Industry Competition Influence Analyst-level Coverage Decisions and Career Outcomes?
Hsu, Charles,Li, Xi,Ma, Zhiming,Phillips, Gordon M.
We analyze whether industry competition is an important factor in analyst coverage decisions and whether analysts benefit from covering product market competitors. We find that analysts are more likely to cover a firm when this firm competes with and offers more similar products to the firms already covered by the analyst. We also find that analysts who cover product market competitors are more likely to obtain star status. These results are consistent with the importance of industry competition and product market knowledge obtained through covering product market competitors to analysts.

EQT: Private Equity with a Purpose
Eccles, Robert G.,Lennehag, Therese,Nornholm, Nina
Private equity (PE) has developed into a very large and important asset class. Over the past 20 years, the industry has grown from USD 650 billion in assets under management (AUM) to USD 5 trillion, of which today USD 1.7 trillion is “dry powder.” The primary factors driving this strong growth has been both the industry’s attractive and stable returns, and its active ownership model. Critical voices however are being raised, questioning whether the PE industry can maintain its historic returns, challenging fee and incentive structures, the industry’s perceived lack of transparency and the noticeable lack of diversity. This is of special interest as the PE industry has become large enough to have systemic effects on social issues like income inequality and environmental issues like climate change. In short, the industry is facing a challenge to its long-term license to operate. This paper describes the journey that EQT, the publicly-listed and Stockholm-headquartered private markets firm (and the eighth largest PE firm in the world in terms of capital raised over the last five years) has taken to develop its model for sustainability and positive impact. EQT is committed to “future-proofing” both its portfolio companies and itself. It has published a “Statement of Purpose” signed by the board of directors, is integrating a societal impact lens across its entire portfolio, has made public commitments about diversity and clean and conscious practices, and is leveraging digital technologies to enhance financial returns and real-world outcomes. The paper argues that EQT’s model of transparency and a mindset of making a positive impact with everything, reinforcing the interdependence of positive real-world outcomes and long-term attractive and stable returns have the prospect of future-proofing the PE industry itself â€" and its contributions to society.

Effectiveness of the Skewness and Kurtosis Adjusted Black-Scholes Model in Pricing Australian Options
Han, Yanrui
This thesis investigates the predictive power of the Skewness and Kurtosis Adjusted Black Scholes model of Corrado and Su (1996) (CS) model in pricing three Australian option contracts (ANZ, BHP and CBA) maturing in March, June, September and December, during the 2007/2008 financial crisis period. Treating the Black Scholes model as a benchmark, we examine the effect of the CS model in order to determine which model better forecasts the observed call prices for the chosen three stocks. We observe that when we account for skewness and kurtosis of distribution of returns, the shape of the CS implied volatility smiles deviate noticeably from that of the BS implied volatilities for short, medium and long term duration. Particularly, for the ANZ September 2008 contracts we observe that the CS model outperforms the BS model in the short and medium term. However, this predictive power disappears in the long-term, signalling that for short and medium-term horizons skewness and kurtosis have significant effect which should not be ignored. The longer term on the other hand the effect of non-normal skewness and kurtosis does not play a role and the BS model outperforms the CS model. When one takes a closer look at the summary results for all the companies with each maturity the predictive power of the models is somewhat puzzling as on an average the BS model seems to outperform the CS model based on their MAE and MSE.

Empirical Asset Pricing in a DSGE Framework: Reconciling Calibration and Econometrics using Partial Indirect Inference
Grammig, Joachim,Schnaitmann, Julie,Elshiaty, Dalia
This paper aims at a critical assessment of the DSGE asset pricing approach. By employing partial indirect inference, we acknowledge that parts of a model are misspecified, while others retain the claim to capture economic reality, namely the ability to price assets traded in real markets. Consequently, we use binding functions that facilitate the consistent estimation of the structural model parameters of interest (concerning investor preferences), while treating others (governing macroeconomic dynamics) as nuisance parameters that are calibrated. The results of our empirical analysis are not unfavorable for the DSGE asset pricing approach, but they also indicate that the very positive interpretation of calibration results, in particular regarding the resolution of asset pricing puzzles, should be taken with a grain of salt.

Examining the Effect of COVID-19 on Foreign Exchange Rate and Stock Market -- An Applied Insight into the Variable Effects of Lockdown on Indian Economy
Indrajit Banerjee,Atul Kumar,Rupam Bhattacharyya

The relationship between a pandemic and the concurrent economy is quite comparable to the relation observed among health and wealth in general. Since 25th March 2020, India has been under a nation-wide lockdown. This work attempts to examine the effect of COVID-19 on the foreign exchange rates and stock market performances of India using secondary data over a span of 48 days. The study explores whether the causal relationships among the growth rate of confirmed cases (GrowthC), exchange rate (GEX) and SENSEX value (GSENSEX) are remaining the same across different pre and post-lockdown phases, attempting to capture any potential changes over time via the Vector Auto Regressive (VAR) models. A positive correlation is found between the growth rate of confirmed cases and the growth rate of exchange rate, and a negative correlation between the growth rate of confirmed cases and the growth rate of SENSEX value. A naive interpretation from this could be that with the rising growth rate of the number of confirmed cases, the economy took a toll, reflected by the Indian currency being depreciated while the stock exchange index suffered from a fall. However, on applying a VAR model, it is observed that an increase in the confirmed COVID-19 cases causes no significant change in the values of the exchange rate and SENSEX index. The result varies if the analysis is split across different time periods - before lockdown, first phase of lockdown and extension of lockdown. To compare the three periods, we had undertaken five rounds of analyses. Nuanced and sensible interpretations of the numeric results indicate significant variability across time in terms of the relation between the variables of interest. This detailed knowledge about the varying patterns of dependence could potentially help the policy makers and investors of India in order to develop their policies to cope up the situation.

Failure to Capture: Why Business Does Not Control the Rulemaking Process
Scheffler, Gabriel
Leading figures on both the political right and the political left have concluded that the agency rulemaking process is captured: that it serves to benefit businesses, at the expense of the general public. This perception appears to be supported by recent theoretical and empirical scholarship and has prompted lawmakers to introduce various proposals to reform the federal rulemaking process.Yet as I will demonstrate in this Article, the view of the rulemaking process as captured is unwarranted. I will show that the academic literature actually provides little guidance as to the magnitude of business influenceâ€"that is, the extent to which businesses are able to achieve their desired regulatory outcomes. Drawing on an extensive and original empirical investigation of the Tank Car Rule, a major rule issued by the Department of Transportation in 2015, I will uncover several key limitations on business influence in the rulemaking process. Taken together, these limitations show that businesses do not routinely exert anything approaching systematic control over the federal rulemaking process.This conclusion undercuts two prominent concerns associated with the capture account of regulation by showing that the regulatory process may still serve the public interest, and by defusing a possible threat to the democratic legitimacy of agency rules. In addition, it provides reason to disfavor major reforms to the rulemaking process, and suggests that some proposed reforms could even have the opposite effect and serve to augment business influence.

From Patriarchy to Partnership: Gender Equality and Household Finance
Zaccaria, Luana,Guiso, Luigi
Using Italian survey data, we document a marked shift in household financial decision-making power from men to women. The share of wife-headed households increased from almost zero in the early 1990s to over 35% in recent years. This reflects a slow but steady social norm transformation that changed family governance from a patriarchal system to an egalitarian one. We use the variation of social norms across cohorts and regions to identify the effects of gender equality on household financial decisions. We find that more gender-neutral norms have a positive effect on household participation in financial markets, equity holdings, and asset diversification; these effects are stronger when the benefits from information and cost sharing between spouses are larger. Importantly, equality increases returns from financial investments. Taken all together, this evidence suggests that gender roles in household financial management can have large economic costs. Consistent with this, we show that the patriarchal system began to be abandoned when a pension reform in the early 1990s made it too costly for the younger cohorts to comply with traditional roles.

Growth Dynamics of Value and Cost Trade-off in Temporal Networks
Sheida Hasani,Razieh Masoomi,Jamshid Ardalankia,Mohammadbashir Sedighi,Hamid Jafari

The question is: What does happen to the real-world networks which cause them not to grow permanently? The idea here is that real-world networks have to pay the cost of growth. We investigate the growth and trade-off between value and cost in the networks with cost and preferential attachment together. Since the preferential attachment in the BA model does not consider any stop against the infinite growth of networks, we introduce a modified version of preferential attachment of the BA model. This idea makes sense because the growth of real networks may be finite. In the present study, by combining preferential attachment in the science of temporal networks (interval graphs), and, the first-order differential equations of value and cost of making links, the future equilibrium of an evolving network is illustrated. During the process of achieving a winning position, the variables against growth such as the competition cost, besides the internally structural cost may emerge. In the end, by applying this modified model, we found the circumstances in which a trade-off between value and cost emerges.

Information, Price, and Barriers to Adoption and Usage of Mobile Money Evidence from a Field Experiment in the Gambia
Cruces, Guillermo,Hamidou, Jawara,Touray, Adama,Singhateh, Fatoumata
Mobile money has been heralded as a way to foster financial inclusion. While it has become popular in developing countries, most notably in African nations, there are still strong barriers to its adoption and usage. The purpose of this study is to examine the extent to which a lack of information and high prices are limiting factors in the adoption of mobile money. We implemented a simple randomized controlled trial among a group of difficult-to- access potential users: mobile phone users in The Gambia who had opened mobile money wallets but had not made a transaction. We offered meaningful price discounts on withdrawal charges, and made these discounts salient by reminding users about them every month for a period of six months. Our analysis measures different dimensions of mobile money use by drawing from administrative mobile phone company records. We also carried out a post- treatment survey to gauge knowledge about, and attitudes towards, mobile money. Our results indicate that treated individuals were substantially more aware than controls about the uses of mobile wallets and about the meaningful discounts of 15% and 30% offered. However, only a small fraction of treated individuals started using mobile wallets, and the difference was not statistically significant. Perceptions of safety, trust in the platform, and service reliability were not significantly different between treated and controls. However, treated individuals were more likely to perceive the service charges to be expensive. We interpret this as evidence that our population of interest was uninformed about the platform at large. While our treatment increased awareness about its capabilities and operation, potentially fostering its adoption, it also increased awareness of the relatively high fees it involves, which in turn limited usage. Both a lack of information and high prices need to be addressed to foster the adoption and usage of mobile money in developing countries.

Ispitivanje kalendarskih sezonaliteta na hrvatskom tržištu kapitala (Testing the Significance of Calendar Effects on Croatian Capital Market)
Tomić, Bojan
Croatian Abstract: Investitori primjenom različitih tehnika, modela i strategija pokuÅ¡avaju konstruirati vlastiti portfelj čija bi dinamika performansi trebala pobijediti tržiÅ¡te, odnosno portfelj koji bi trebao ostvariti prinose viÅ¡e od prinosa tržiÅ¡ta u ravnoteži. Aktivnosti potrage za podcijenjenim dionicama, kao i kontinuirano trgovanje s njima, trebalo bi rezultirati tržiÅ¡tem koje je informacijski efikasno, tj. tržiÅ¡tem čija agregatna vrijednost odražava sve relevantne i dostupne informacije vezane za pojedine instrumente. Navedena definicija sugerira da primjena bilo kakvih tehnika, analiza i strategija s ciljem projekcije buduće cijene vrijednosnice ne može ostvariti željeni rezultat investitora jer su dostupne relevantne informacije već integrirane u tržiÅ¡nu cijenu. S druge strane, ukoliko je hipoteza o efikasnosti tržiÅ¡ta točna, kalendarski sezonaliteti ne bi trebali postojati. Efekt ponedjeljka, dana u tjednu, odnosno vikend efekt su kalendarske anomalije koje su već ispitivane i dokazane na razvijenim tržiÅ¡tima kapitala, kao i na tržiÅ¡tima u nastajanju. Očituju se tako da odreÄ'eni dan u tjednu može utjecati na dinamiku prinosa dionica. U ovom se radu ispituje prisutnost efekta ponedjeljka, efekta dana u tjednu, kao i prisutnost efekta tjedna u mjesecu na hrvatskom tržiÅ¡tu kapitala. Dobiveni rezultati potvrÄ'uju postojanje efekta ponedjeljka, ali i prisutnost drugih kalendarskih obrazaca, čime se dovodi u pitanje točnost hipoteze o efikasnosti tržiÅ¡ta, kao i same efikasnosti hrvatskog tržiÅ¡ta kapitala.English Abstract: Using different techniques, models and strategies investors are trying to construct their own portfolio whose dynamic performance should beat the market, or portfolio that should achieve yields more than the yield of the market in equilibrium. Active search for undervalued stocks, as well as the continuous trading with them, should result in a efficient market, which reflects aggregate value of all relevant and available information related to the individual instruments. This definition suggests that the use of any kind technique, analysis and strategies to project future prices of securities may not achieve desired result of investors, because the relevant information are already integrated in the market price. On the other hand, if the efficient markets hypothesis is accurate, calendar anomalies should not exist. The Monday effect, the day of the week or the weekend effect are the calendar anomalies that have already been tested and proven in the developed capital markets, as well as in the emerging markets. They are expressed so that a specific day of the week can affect the dynamics of share return. This paper examines the presence of Monday effect, the day of the week effect, as well as the presence of the week of the month effects in the Croatian capital market. The results confirm the existence of Monday effect, but also and the presence of other calendar patterns, which brings into question the accuracy of the efficient markets hypothesis, as well as the very efficiency of the Croatian capital market.

Komparativna analiza europskog tržišta kapitala i Dow Jones Industrial Average indeksa (Comparative Analysis of European Capital Market and Dow Jones Industrial Average Index)
Tomić, Bojan
Croatian Abstract: Racionalni pristup investiranju očituje se kroz ostvarivanje Å¡to većeg prinosa za danu razinu rizika, odnosno ostvarivanje danog prinosa uz prihvaćanje Å¡to manje razine rizika. U procesu investiranja, investitorima se nameće pitanje učinkovite diversifikacije kao nužan preduvjet u ostvarenju svog cilja. Ekonomska kriza u Å¡irem smislu, koja se 2007. godine dogodila u SAD-u, generirala je i ekonomsku krizu na području eurozone, odnosno krizu na globalnoj razini. Industrijsko-financijska povezanost SAD-a i Europe doprinijela je bržem „razvoju“ krize te kao uzročno posljedičnu vezu Å¡irenju krize i na tržiÅ¡ta kapitala u Europi. Budući da se već postojanjem ekonomske povezanosti potvrÄ'uje njihova meÄ'uovisnost, postavlja se pitanje u kojoj se mjeri i koliko točno može opisati utjecaj SAD-a na europsko tržiÅ¡te kapitala. Svrha ovog rada je ustanoviti, kvantificirati i opisati utjecaj, odnosno korelaciju izmeÄ'u vodećeg američkog Dow Jones Industrial Average (DJIA) indeksa i europskog tržiÅ¡ta kapitala. U tu svrhu, europsko tržiÅ¡te kapitala je predstavljeno kao optimalni rizični portfelj kreiran od deset odabranih dioničkih indeksa EU-a te je prikazan u obliku europskog tržiÅ¡nog indeksa. Konačno, modelom jednostavne linearne regresije ustanovljena je značajna zavisnost kreiranog europskog indeksa u odnosu na DJIA indeks Å¡to ukazuje da je s visokim postotkom pouzdanosti moguće predvidjeti i objasniti kretanje vrijednosti europskog tržiÅ¡ta kapitala na osnovu promjene vrijednosti DJIA indeksa.English Abstract: A rational approach to investing is manifested through the realization of a higher yield for a given level of risk, and the realization of a given yield by accepting lower risk levels. Through the investment process, the question that is brought to investors’ attention is the importance of effective diversification as a necessary prerequisite for successful goal achievement. Generally speaking, economic (financial) crisis that originally started in the USA in 2007 helped generating the economic crisis in the Eurozone and then globally. Industrial and financial connection between the U.S. and Europe has contributed to the rapid “development” of the crisis and a causal relationship and the spread of the crisis across European capital market. Since the close economic connection already indicates the interdependence between U.S. and European markets, the question is: How large is the influence that the USA has over the European capital and what are the appropriate ways to measure and describe that influence. The purpose of this study is to identify, quantify and describe the impact, and the correlation between the leading U.S. Dow Jones Industrial Average (DJIA) index and European capital markets. In this case, the European capital market is presented as an optimal risk portfolio created from ten selected EU equity indices of and is shown in the form of a European market index. Finally, simple linear regression demonstrated significant dependence of the created European index upon the DJIA index, which indicates that there is a high probability that we can predict and demonstrate how DJIA index value changes affect on European capital market movements.

Log-optimal portfolio and num\'eraire portfolio for market models stopped at a random time
Tahir Choulli,Sina Yansori

This paper focuses on num\'eraire portfolio and log-optimal portfolio (portfolio with finite expected utility that maximizes the expected logarithm utility from terminal wealth), when a market model $(S,\mathbb F)$ -specified by its assets' price $S$ and its flow of information $\mathbb F$- is stopped at a random time $\tau$. This setting covers the areas of credit risk and life insurance, where $\tau$ represents the default time and the death time respectively. Thus, the progressive enlargement of $\mathbb F$ with $\tau$, denoted by $\mathbb G$, sounds tailor-fit for modelling the new flow of information that incorporates both $\mathbb F$ and $\tau$. For the resulting stopped model $(S^{\tau},\mathbb G)$, we study the two portfolios in different manners, and describe their computations in terms of the $\mathbb F$-observable parameters of the pair $(S, \tau)$.

Mapping Coupled Time-series Onto Complex Network
Jamshid Ardalankia,Jafar Askari,Somaye Sheykhali,Emmanuel Haven,G. Reza Jafari

In order to extract hidden joint information from two possibly uncorrelated time-series, we explored the measures of network science. Alongside common methods in time-series analysis of the economic markets, mapping the joint structure of two time-series onto a network provides insight into hidden aspects embedded in the couplings. We discretize the amplitude of two time-series and investigate relative simultaneous locations of those amplitudes. Each segment of a discretized amplitude is considered as a node. The simultaneity of the amplitudes of the two time-series is considered as the edges in the network. The frequency of occurrences forms the weighted edges. In order to extract information, we need to measure that to what extent the coupling deviates from the coupling of two uncoupled series. Also, we need to measure that to what extent the couplings inherit their characteristics from a Gaussian distribution or a non-Gaussian distribution. We mapped the network from two surrogate time-series. The results show that the couplings of markets possess some features which diverge from the same features of the network mapped from white noise, and from the network mapped from two surrogate time-series. These deviations prove that there exist joint information and cross-correlation therein. By applying the network's topological and statistical measures and the deformation ratio in the joint probability distribution, we distinguished basic structures of cross-correlation and coupling of cross-markets. It was discovered that even two possibly known uncorrelated markets may possess some joint patterns with each other. Thereby, those markets should be examined as coupled and \textit{weakly} coupled markets.

No COVID-19 Climate "Silver Lining" in the U.S. Power Sector: CO$_2$ Emissions Reductions Not Statistically Significant, Additional Risk to Coal Generators is Minimal
Max Luke,Priyanshi Somani,Turner Cotterman,Dhruv Suri,Stephen J. Lee

Recent studies conclude that the global coronavirus (COVID-19) pandemic decreased power sector CO$_2$ emissions worldwide. We analyze the statistical significance of CO$_2$ emissions reductions in the U.S power sector from March through July 2020 and we present model-informed expectations of the likelihood of sustained reductions in CO$_2$ emissions. We use Gaussian process (GP) regression to assess whether CO$_2$ emissions reductions would have occurred with reasonable probability in the absence of COVID-19 considering uncertainty due to factors unrelated to the pandemic. We show that CO$_2$ emissions are lower than levels expected in the absence of COVID-19 for each month from March through July 2020 but that those monthly reductions are not statistically significant considering hypothesis tests at 5% significance levels. To make predictions about whether COVID-19-related CO$_2$ emissions reductions will be sustained in the power sector, we assess the relative impacts of the pandemic on electricity generation (E) and on the carbon intensity of electricity supply (C/E). E is on average 2.9\% lower than what we would expect in the absence of COVID-19 from March through July 2020. We expect E to rebound alongside a recovery of the U.S. economy. C/E is determined to be 2.7% lower on average than what we would expect in the absence of COVID-19 from March through July 2020. Reductions in C/E are mostly attributable to reductions in the share of coal-fired electricity generation. We analyze the expected profitability through 2021 of the 845 coal-fired power plant units operating in the U.S. We find that only 76 of those units, representing 1.3% of total coal generation capacity, were expected to be profitable prior to COVID-19 but are no longer expected to be profitable. We conclude that COVID-19 is unlikely to have a material impact on U.S. power sector CO$_2$ emissions in the long-run.

Role and Effectiveness of ASIC Compared with the SEC: Shedding Light on Regulation and Enforcement in the United States and Australia
Kavame Eroglu, Zehra G.,Powell, K.E.
Australian Securities and Investments Commission’s (ASIC) regulatory oversight of securities and financial markets has increased considerably over time. However, the wisdom of this model has recently been challenged by the Hayne Royal Commission as ASIC’s enforcement activities were found to be relatively toothless. Accordingly, many criticised the agency and called for further ASIC reform. After the Global Financial Crisis, the US Securities and Exchange Commission (SEC) faced similar criticisms of regulatory failure. As such, this paper analyses the SEC regulatory structure, enforcement activities, and governmental resources and compares certain indicators of effectiveness such as the number of employees, budgets, and enforcement activities with those of ASIC over the past quarter-century. By comparing ASIC with the world’s biggest capital market regulator, the SEC, this paper analyses the viability of further reform of ASIC, and argues that ASIC is woefully under-resourced to engage in increased enforcement action.

Scaling Features of Price-Volume Cross-Correlation
Jamshid Ardalankia,Mohammad Osoolian,Emmanuel Haven,G.Reza Jafari

Price without transaction makes no sense. Trading volume authenticates its corresponding price, so there exist mutual information and correlation between price and trading volume. We are curious about fractal features of this correlation and need to know how structures in different scales translate information. To explore the influence of investment size (trading volume), price-wise (gain/loss), and time-scale effects, we analyzed the price and trading volume and their coupling by applying the MF-DXA method. Our results imply that price, trading volume, and price-volume coupling exhibit a power law and are also multifractal. Meanwhile, considering developed markets, the price-volume couplings are significantly negatively correlated. However, in emerging markets, the price has less of a contribution to price-volume coupling. In emerging markets in comparison with the developed markets, trading volume and price are more independent.

Securing the Future of the Financial Industry through Improved Gender Diversity
Kämpfer, Kristina ,Wojcik, Dariusz
Unlike any of its predecessors, the 2007 â€" 2009 financial crisis drew attention to the lack of diversity at the top of the finance industry. In particular, it ignited the debate on whether greater gender diversity could have impacted the course of events surrounding or even prevented the crisis. However, despite empirical evidence for a business case in (leadership) diversity as well as regulatory pressure, for example by the UK government, financial services continues to be an industry that is governed almost exclusively by an elite, male minority. The interdisciplinary approach adopted in this paper seeks to move beyond the business case logic by combining insights from financial geography and feminist theory. This paper unpacks work cultures and practices in the financial centres of London and Frankfurt. Exploring the institutional and cultural setting in which financial companies operate, we seek to answer the question of how (gender) diversity can become core to business in finance from a new perspective. The analysis is based upon a desk-based review of diversity policies of financial companies as well as data collected through 52 semi-structured interviews with external and internal stakeholders in the financial centres of Germany and the United Kingdom. It shows that support from senior management is key to greater diversity, whereas the culture of an organisation is perceived as the biggest obstacle. Culture, and thus diversity, is dependent upon context. The comparative study of London and Frankfurt reveals that understandings and practices of diversity are highly location-dependant. Despite being a heavily interconnected industry, the research shows that financial services itself are more geographically diverse than assumed. Hence, cultural as well as institutional variations are central to understanding the progress â€" or lack thereof â€" of diversity within financial companies in different geographies. This has implications for the competitiveness of financial centres and make-up of financial elites. Financial companies that strive for greater diversity and for which elite labour is a key resource need to pay particular attention to the cultural and institutional framework, within which they are embedded and operate.

Some Empirical Models of Japanese Government Bond Yields Using Daily Data
Akram, Tanweer,Li, Huiqing
This paper models the dynamics of Japanese government bond (JGB) nominal yields using daily data. Models of government bond yields based on daily data, such as those presented in this paper, can be useful not only to investors and market analysts, but also to central bankers and other policymakers for assessing financial conditions and macroeconomic developments in real time. The paper shows that long-term JGB nominal yields can be modeled using the short-term interest rate on Treasury bills, the equity index, the exchange rate, commodity price index, and other key financial variables.

Spread Options: From Margrabe to Kirk
Etesami, Seyyed Ruhollah
Kirk provided an approximate closed-form solution for the price of a spread option. This paper is written in response to ref. published in Applied Mathematics Letters in which the author believes no explicit derivation of Kirk’s approximation from Margrabe’s exchange option formula is available or has ever been published. Here we provide such an explicit derivation.

Status hierarchy and group cooperation: A generalized model
Hsuan-Wei Lee,Yen-Ping Chang,Yen-Sheng Chiang

In a refreshing mathematical investigation, Mark (2018) shows that status hierarchy may facilitate the emergence of cooperation in groups. Despite the contribution, the present paper notes that there are limitations in Mark's model that makes it less realistic than it could in explaining real-world experiences. Consequently, we present a more generalized modified framework in which his model is a special case, by developing and introducing a new hierarchy measure into the model to estimate the cooperation level in a set of hierarchical structures omitted in Mark's work yet common in everyday life--those with multiple leaders. We derived the conditions under which cooperation can emerge in these groups, and verified our analytical predictions in agent-based computer simulations. In so doing, not only does our model elaborate on its predecessor and support Mark's general prediction. For theory, our work further reveals two novel phenomena of group cooperation: Both the relative number of cooperators to defectors in groups and the assortativity among these different roles can backfire; they are not always the higher, the better for cooperation to thrive. For methodology, the hierarchy measure developed and our model using the measure may also be applied in future research on a wide range of related topics.

The Epidemic-Driven Collapse in a System with Limited Economic Resource
I.S. Gandzha,O.V. Kliushnichenko,S.P. Lukyanets

We consider a possibility of socioeconomic collapse caused by the spread of epidemic in a basic dynamical model with negative feedback between the infected population size and a formal collective economic resource. The epidemic-resource coupling is supposed to be of activation type, with the recovery rate governed by the Arrhenius-like law and resource playing the role of temperature. Such a coupling can result in the collapsing effect opposite to thermal explosion because of the limited resource. In this case, the system can no longer stabilize and return to the stable pre- or post-epidemic states. We demonstrate that such a collapse can partially be mitigated by means of a negative resource or debt.

The Politics of Personalized News Aggregation
Lin Hu,Anqi Li,Ilya Segal

We study how personalized news aggregation for rational inattentive voters (NARI) affects policy polarization and public opinion. In a two-candidate electoral competition game, an attention-maximizing infomediary aggregates information about candidates' valence into news. Voters decide whether to consume news, trading off the expected gain from improved expressive voting against the attention cost. NARI generates policy polarization even if candidates are office-motivated. Personalized news serves extreme voters with skewed signals and makes them the disciplining entities of policy polarization. Analysis of disciplining voters' identities, preferences and beliefs sheds light on the political effects of recent regulatory proposals to tame tech giants.

Trustworthiness in the Financial Industry
Gill, Andrej,Heinz, Matthias,Schumacher, Heiner,Sutter, Matthias
The financial industry has been struggling with widespread misconduct and public mistrust. Here we argue that the lack of trust into the financial industry may stem from the selection of subjects with little, if any, trustworthiness into the financial industry. We identify the social preferences of business and economics students, and follow up on their first job placements. We find that during college, students who want to start their career in the financial industry are substantially less trustworthy. Most importantly, actual job placements several years later confirm this association. The job market in the financial industry does not screen out less trustworthy subjects. If anything the opposite seems to be the case: Even among students who are highly motivated to work in finance after graduation, those who actually start their career in finance are significantly less trustworthy than those who work elsewhere.

Uncertainty Shocks and Corporate Policies
Avramov, Doron,Li, Minwen,Wang, Hao
We develop a firm-level measure of uncertainty shocks through textual analysis of firm annual reports. We find that uncertainty shocks are followed by a short-term reduction in leverage and dividend payouts, while investment, employment, and cash holdings remain unchanged. In contrast, text-based first-moment shocks are followed by long-lasting diminishing leverage, investment, employment, dividend payouts, and stock repurchases, and increasing cash holdings. Small, non-profitable, and high credit risk firms are more responsive to uncertainty and first-moment shocks. Overall, first-moment shocks trigger persistent policy adjustments, while managers adopt a "wait-and-see" strategy until uncertainty resolves. The evidence is robust to various considerations.

Variance Contracts
Yichun Chi,Xun Yu Zhou,Sheng Chao Zhuang

We study the design of an optimal insurance contract in which the insured maximizes her expected utility and the insurer limits the variance of his risk exposure while maintaining the principle of indemnity and charging the premium according to the expected value principle. We derive the optimal policy semi-analytically, which is coinsurance above a deductible when the variance bound is binding. This policy automatically satisfies the incentive-compatible condition, which is crucial to rule out ex post moral hazard. We also find that the deductible is absent if and only if the contract pricing is actuarially fair. Focusing on the actuarially fair case, we carry out comparative statics on the effects of the insured's initial wealth and the variance bound on insurance demand. Our results indicate that the expected coverage is always larger for a wealthier insured, implying that the underlying insurance is a normal good, which supports certain recent empirical findings. Moreover, as the variance constraint tightens, the insured who is prudent cedes less losses, while the insurer is exposed to less tail risk.